Here’s An Unusual Situation in an HOA! Too Much Money!

I don’t get this one very often, its a quandary about having accumulated too much money and not knowing what to do about it.

“As a new reader of your site, I’d like to thank you for posting so much useful information.

I am writing with an unusual HOA problem: too much money in the operating account. We are a small HOA. Over the last 3-4 years the Board … has accumulated a cash surplus of over [$…] in the operating account. This was accomplished by over budgeting for services that either had been reduced or eliminated entirely. [The overage accumulation…] was not disclosed to the HOA members until very recently, at a BOD meeting.

Not coincidentally, the Board now wants to spend the money to install […] which will cost just over $[close to the amount of the overage].

The ballots for the last Board election  contained the usual box to check off in order to roll unused funds from this year into 2013. There was no disclosure of the significant surplus. There was never an authorized accrual/reserve for the [… improvement the board wants…]. The HOA is to vote [soon] on CC&R changes to accommodate the [new improvement]. The Board is touting the fact that a special assessment won’t be required since we have a huge surplus. However, even the past Treasurer, claims no knowledge of the large surplus. I’m deeply troubled by both the lack of transparency and [… ].  Your thoughts?”

Even though unusual, this does happen. Boards are sometimes advised by professionals, CPAs and attorneys, not to return overages in any case where there is the possibility that the money might be “needed”. This is because overages are so uncommon, I think. However, boards are always advised to pose the resolution to the members to carry over any excess income in order to avoid taxation issues on the maintenance funds collected.

I have seen this happen before, however. On occasion boards have come to me with an overage asking if they have to return the money to the owners or can spend it on some improvement. I ask a few questions, such as whether the improvement is something  the board has considered at prior board meetings where owners, if they had attended, would have known. I ask how important the item is to the membership, and whether it has been vetted.  And I ask whether the board as a group IS SURE that there are no large maintenance or repair projects coming up in the near future (like reroofing, reconstruction of decks, or exterior paint jobs) that might result in overruns due to such things as hidden dry rot.

Owners do sometimes feel that subjects are “dropped” on them without preparation but in some cases the truth is that they do not take any pains to inform themselves of what is going on by reading notices or agendas or by attending meetings. Apathy is a huge problem in homeowner associations. It would be a problem here if the board did not distribute the financials that are required to be sent to members after the end of the fiscal year. These legally required financials must contain disclosure of the income and expenses, and a Review performed by a CPA or accountant if the income is more than $75,000 for the year is also a legal requirement. So, if the board followed the law, the overage would be reflected, but one would have to read the financials to see it.

That said, I always believe it important to give the owners a chance to weigh in if there is a sizable overage to be dealt with. And a survey is a good place to start. Provide the owners with sufficient information and opportunity to provide an informed response to the question of what to do with the money.

I can remember not that many years ago when the State of California issued tax rebate checks in the sum of $200 or more to all residents who pay taxes and the very next year, announced budget problems had come to light and couldn’t agree on where to cut. Huh! Now that would be upsetting to HOA members.


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2 Responses to Here’s An Unusual Situation in an HOA! Too Much Money!
  1. christine whitaker
    January 12, 2013 | 9:46 pm

    I have a question: Our community was to be a 700+ town home complex, private roads on a golf course. Developer backed out, no golf course, only 176 condos built. New owner wants variance to put 3 story apts on remaining land, and we have found attys who can fight this variance on legal and equitable grounds. At 11th hour, some are saying that it is illegal to use the money from reserves (5 yr old community, 400K in reserves, and likely more savings to come bec. we hired a const. defect firm for defects that we already budgeted for but now will not have to pay for). I don’t understand DRE rule that we can’t use reserves for unplanned legal matter that we need to fight. We’ve had for past 11 months excess operating of 11K which we put into reserves every month. Had 2 yrs of 1 month dues holiday which cost us 80K bec. we were told we can’t have that much $ in operating. Can we use reserves for legal fight? Tx!

    • Beth Grimm
      January 17, 2013 | 7:54 pm

      A lot about this question might be answered by a review of the governing documents. If it is a legitimate act authorized or justified by the governing document language then there are legal ways to justify the expenditure of association funds, but there would have to be a way to repay funds designated for another purpose, like reserves. I find a better way of doing it to be completely up front with owners and ask for survey responses or even approval of a ballot measure for a special assessment to pay for the challenge or for approval of use of funds before the action is filed, assuming of course that there is time to do things properly and you are not under the gun.